Quote from newguy05:
Some of the answers above is not 100% correct.
1) Visualize bitcoin network as a stack of linked pages
2) Each page records some of the most recent transactions (ie: address 1 sent x bitcoin to address 2). Once recorded, those can never be changed.
3) New pages are added at the end of the stack as they are unlocked. To unlock, computers compete to guess (not solve, 1 of the great misconceptions) the correct hash (sha-256) of the page . Once the lucky computer guessed it right meaning the answer(called hash) is verified by the other computers, the said computer is awarded with the bitcoins in that page, which now becomes part of the network and is put into "circulation".
4) The newly unlocked page is added to the end of the stack with the most recent transactions and also a record of the new bitcoins released, for those bitcoins this will be their very first transaction - creation. So each bitcoin can be traced all the way back to the page it was created on.
5) Each page unlocked rewards the computer that did it with 50 bitcoin, that reward is halved every 210000(i think) new pages, that takes approx 4 years to unlock. Right now the network already unlocked >210000 pages, so the new pages unlocked only give 25 bitcoin as reward. After 210000 more pages are unlocked in 2-3 years, each page will only give 12.5 bitcoins etc..putting a cap on max.
Now replace with bitcoin terms: page = block, stack of linked pages = block chains.
That's pretty much it in a nutshell, it is an absolutely brilliant design, whoever came up with it is a true genius, too bad we dont know who it is.
This basically provides a complete audit trail for every single transaction since day 1 out of the box for free, it also protects the network as more computers try to solve those problems.
When dramaticist‎ like pekelo says 51% attack, what they really mean is someone that controls 51% of all the computers in the network, can make those computers give false info when a page is unlocked. So a computer can guess a wrong answer, and the 51% bad computers can lie and say that is correct, while 49% of the good computers says incorrect as expected, but since 51% > 49% the wrong answer becomes correct and the page is unlocked and recorded. If this continues for a long time, then you will have many wrong unlocked page and the network is destroyed, but short term it is not as a big issue as once the good computers becomes 51% again they can correct the validation going forward, also all the old pages are not touched.
